Abstract
The attribution of profits to Permanent Establishments (PE) is one of the most discussed topics in international tax literature, the reason being that the attribution determines the amount of taxation in a PE state. Particular problems arise if such profits are derived before or after the existence of a PE. The article discusses the attribution of such profits under tax treaty law provided for by the OECD Model Tax Convention. In doing so, it is found that profits derived before or after the existence of a PE should be attributed to the PE because not only the wording but also the context and purpose of the OECD Model support this view. In further analysis, however, it is shown that slight changes in the attribution may be expected under the new “Authorized OECD Approach”.
Highlights
If an enterprise maintains a Permanent Establishment (PE) in another state, the allocation of taxing rights for the profits of the enterprise requires the attribution o f profits to the Permanent Establishments (PE) 1
Following the arguments outlined so far, PE profit allocation should not depend on the tim e when the incom e is derived
All incom e is allocated to a PE to the extent that it is caused by an activity carried on in this or through this PE at the tim e o f its existence[58]
Summary
If an enterprise maintains a Permanent Establishment (PE) in another state, the allocation of taxing rights for the profits of the enterprise requires the attribution o f profits to the PE 1. Tax treaties govern the allocation o f taxing rights for business profits under Art. 7 o f the O EC D M odel by means o f the so-called PE concept[7] According to this principle, a state may only tax the profits of an enterprise of the other state if the enterprise carries on its business through a PE situated in its territory and, under such conditions, only the portion o f the profits that is attributable to the PE. According to the benefit principle, taxation may be justified in this case because even the enterprise benefits from the public goods o f that state[12] Notwithstanding the latter, treaty practice regularly ties the taxing right for business profits to a PE being a fix e d place o f business. The taxation based on the benefit principle becom es secondary to practicability aspects
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